This article is part of Executive’s special report on the oil and gas sector. Read more stories as they’re published here, or pick up October’s issue at newsstands in Lebanon.
A paradox confronts countries endowed with oil and gas resources. Despite their riches, these countries tend to grow slower in the long term, have higher income inequality, be more corrupt and even become authoritarian. This, of course, is not the fate of all such countries — many have managed to turn the oil curse into a blessing. Those that did had two things going for them: a high level of human capital and good institutions that upheld checks and balances on power.
Although Lebanon is well endowed with human capital, its institutions are generally weak. The Taif Agreement redistributed power more equally across the three key institutions — the presidency, the parliament and the prime ministership — that are associated with the three dominant sects, and in many ways, undermined the political system. For one, the executive authority became diffused to an extent that it is no longer obvious who is in charge. The members of the parliament seem less interested in legislating and holding executive authority accountable and more interested in providing services to constituents. The political parties have mastered the game of electoral survival by crafting election laws through redistricting and vote counting in ways that get them reelected with little to show for. They have resorted to clientelistic strategies of buying votes and providing services in return for political loyalty. Furthermore, the judiciary and the oversight agencies whose job it is to hold the government accountable were at best sidelined but most often intentionally weakened through political interventions or bureaucratic understaffing.
In sum, the political elite govern the country largely by the logic of dividing the spoils among themselves through illegal subcontracting of projects, violating tendering requirements, as well as contracting companies despite conflicts of interest. This has resulted in high levels of corruption, embezzlement, mismanagement and waste benefiting the political elite at the expense of the rest of the population.
It is against this backdrop that the Lebanese Petroleum Administration (LPA), the body entrusted to govern the oil sector, came into being. Between November 2012 and August 2013, the LPA proceeded rather efficiently and with more transparency than most Lebanese institutions in approaching the sector. It held consultative meetings and workshops, and managed to lay the groundwork for the launch of the offshore licensing round. Now it is waiting on the government to pass the last decrees for the process to continue, and has found itself caught up in the Lebanese political mill with no clear way out of the deadlock.
The challenges awaiting Lebanon to transform oil and gas into sustainable development are many and go beyond the work and responsibility of the LPA to include ministries, oversight agencies and the government at large.
In reaction to this challenge, many local and international actors are advocating that Lebanon sign up to the Extractive Industries Transparency Initiative (EITI), which aims to enhance transparency in the sector (see “Safety in numbers“). The EITI is a voluntary coalition of government, oil companies and civil society organizations (CSOs) whose aim is to promote transparency and accountability in revenue management. Countries that express interest in the EITI must pledge to work with the private sector and civil society, appoint an individual to lead the process and produce work agreed upon by all stakeholders. Within a period of 18 months, the multistakeholder group (MSG) must publish a report that discloses the revenues — taxes, royalties and other sources — received by the government. It is argued that once the data becomes transparent, this will lead to accountability.
However, despite the best of its intentions, the EITI will most likely not solve Lebanon’s problems. For one, the output of the MSG, which is the audit report, compares how much oil and gas companies paid with how much the government received. In accounting terms, they are effectively telling us whether the numbers agree — but what it does not tell us is whether the numbers are correct. In other words, there is no way we can know from this exercise whether Lebanon got the optimal government take or whether its royalties are high enough. This is particularly important in Lebanon since the country’s procurement process in other sectors has generally been at best opaque.
Furthermore, other problems arise in regard to the audit report published by the EITI group: the fact that companies work on an accrual basis — which records sales and purchases when commitments are made, regardless of when cash is actually transferred — whereas governments typically work on a cash basis makes audit reports liable to manipulation. Another problem is that reports do not necessarily show how much each company is paying the government.
The second issue is that the EITI’s work is based on the inaccurate premise that transparency “can only lead to accountability if there is an understanding of what the figures mean and public debate about how the country’s resource wealth should be managed.” Although the disclosure of information and public debate is necessary, it is by no means sufficient to hold the government accountable. The audit report published by the EITI can definitely — if written succinctly and clearly — inform and even enlighten citizens but it will likely not lead to accountability. Lebanon is particularly notorious for this as many violations are reported by oversight agencies in their yearly reports or the media but little or nothing is done about them. In a nutshell, the system has rarely held anyone accountable.
The fact that CSOs are represented in the MSG may be a good thing at first as it shows strong inclinations for an inclusive process. However, it is important to note that generally, CSOs are the weakest link in the group made up of the government and oil companies. To assume that they will be able to stand up to both parties or even that they are independent is a gross assumption. CSOs have no formal enforcement mechanism and may not be representative of the public. Another concern is that CSOs in the MSG may end up being coopted.
However, the major shortcoming of the EITI is that it focuses on one element of the value chain: transparency in revenue. In other words, it ignores the challenges facing the country in upstream activities, especially in awarding contracts, and the downstream activities of revenue distribution. In fact, the source of the oil curse problem is not only about outright corruption per se. It is not necessarily about money disappearing into pockets of officials, but rather about money being spent inefficiently. In fact, cross national studies have shown that the problem of the resource curse is largely of two kinds: it draws people out of the productive sectors and into rent seeking, and it allows politicians to use resource rents to generate support through inefficient allocation of jobs in the public sector. Lebanon is particularly vulnerable to these ills since its democratic system is highly personalized and patronage networks and clientelism are rampant.
Although the EITI is a first step toward accountability, it falls short of what we aspire for. In fact, one major concern is that once Lebanon signs up to the EITI, it gives the impression that we are doing something about transparency or that the government is fulfilling its obligations by meeting the requirements of global initiatives. The EITI would, in this instance, become the end rather than the means. More worryingly, investing in the EITI may divert resources from the real issues that are beyond reconciling the taxes and royalties paid by companies to the government.
We need to go beyond the EITI and adopt a more comprehensive approach that tackles the various phases of the oil and gas value chain, from the preparation phase of awarding contracts all the way to how revenues are spent and their effects on the country. In each phase, we need to think creatively about how to push for transparency and accountability despite the current constraints. I do not believe that there is a textbook case to adopt, and hence we need to think of ways to break the opaqueness of the system and push for an accountability mechanism for the system to be credible. We need to find ways to break free from our poor institutions and establish new ones. The parameters of such an institutional infrastructure could be as follows:
For one, the LPA must have more autonomy vis-à-vis the Ministry of Energy and Water (MoEW) and must have control over its own budget. Its decisions — pending that they do not infringe on the competitiveness of the process — must become public before they are submitted to the ministry so the public can monitor how policies are changing, who is changing them and why. Any decision or policy must be accompanied by explanation and justifications. Furthermore, oil companies must be forced to reveal all relevant material to a public body, or otherwise risk losing their contracts.
The government, with the MoEW, must develop an energy policy so we have a sense of where the sector is going, how oil and gas discoveries factor in and how the government plans to deal with their effects on the economy.
The parliament and particularly the energy parliamentary committee must play a more effective role. To do so, it must develop its technical capacity so it can review, contribute and debate the government’s policy outlook. It must not only be consulted by the LPA and the government, but it must hold regular public hearings on oil and gas policy in addition to the MoEW, LPA, Court of Audit and other relevant oversight agencies to answer questions. These hearings must involve experts and CSOs. The committee’s purpose is primarily to hold the government accountable but also to establish a national consensus on oil and gas policy.
As for CSOs being more informed, they must build their capacity by learning about the sector. They must hold their own debate and discussion on how best to monitor the oil and gas sector. To be more representative, they ought to pool their resources to organize a coalition or a network. In this way, they can more effectively participate in the parliamentary public hearings.
On the policy level, the government and concerned ministries must develop policies to prevent people from leaving their productive sectors in favor of rent seeking, which is very common in resource rich countries. Furthermore, we need to constrain politicians from using oil revenues to generate public jobs in return for political support.
While adopting the EITI may provide a good start toward proper utilization of revenues from oil and gas, alone it would be woefully inadequate. For Lebanon to turn its oil from a curse into a blessing, it must lock in a better institutional architecture than the one we currently have.